ON February 26 last year, a manila envelope crammed full of documents arrived at a house on the Isle of Wight. Inside was a dossier that amounted to a detailed indictment of the tax credit fiasco that will cost the country as much as £2.8 billion.

The documents - and tapes of telephone conversations that arrived some weeks later - were obtained under data protection laws and detailed the tax credit claim of Simon Blackmore, 38. He was being pursued for £6,057 in tax credits.

“Screen grabs” of Blackmore’s case provide a snapshop of a system on the brink of chaos. Software glitches caused a series of errors on Blackmore’s files, including the wrong income details and the removal of his six-year-old daughter from some of the assessments. Faced with Blackmore’s dossier, HM Revenue & Customs (HMRC) relented last Thursday and told him he would no longer be pursued for the alleged overpayments of 2003 and 2004.

“Gordon Brown claims the tax credits system lifts children out of poverty,” said Blackmore. “Maybe it does, but only to plunge them and their families into debt two years later.”

Across the country, similar packages to Blackmore’s are dropping on doormats as the victims of the tax credit overpayment debacle fight back against the thousands of pounds of debts they have been saddled with. After the debacle of the loss of personal data of 25m people last year, HMRC now faces a backlash over its pursuit of 1.5m families to whom it overpaid tax credits.

Many of the documents show that errors previously blamed on the public were in fact the mistakes of tax credit officials and faulty computer software. The evidence means that significantly more of the billions of pounds in outstanding debt will have to be written off than previously thought.

A former HMRC official, who has gone through some of the documents, claims many of the overpayments were triggered by “rogue” files that could not be erased from the system.

The former official, who has asked not to be named, said: “We put duplicate files into the system because the software could not calculate the payments on original files that were inputted incorrectly. We were never able to erase those files and they have always been there in the background causing a lot of the errors.”

When Gordon Brown, then chancellor, launched the tax credits system in September 2002, he promised the “biggest revolution to tax and benefits” since William Beveridge, the architect of the welfare state.

About 6m families benefited, but the overpayments were far greater than anyone envisaged, creating a time bomb of debt for some of the poorest and most vulnerable in society. Each year about 2m families are given overpayments, which now total £8 billion.

Ministers conceded that there were “initial IT problems” and EDS, the government contractor, agreed to pay £71.25m in compensation. But the vast bulk of the problems have been blamed on losses from fraud and claimants who were unfamiliar with the “rules and processes”.

Those who have been overpaid credits have been zealously pursued by tax officials. Claimants were ordered to pay back the money and told in writing: “You have no right of appeal against our decision.”

Those who tried to appeal complain of being rebuffed and threatened with court action. Faxes from an HMRC office that deals with disputes were headed “War Room”.

Some of those being pursued by HMRC refused to pay back the money and an action group - Tax Credit Casualties - gave advice on how to obtain internal documents using data protection laws. Many of those documents have successfully been used to overturn HMRC’s decisions.

Chris Parker, 51, who lives near Caernarfon, Gwynedd, obtained records of his telephone calls and “screen grabs”. He discovered that his wife’s income had been zeroed by the computer, which commonly occurred when any new data were entered on a case file.

The mistake meant that Parker and his wife Sharon, 46, were paid extra tax credits, but he says he never received any official documentation showing the error. Parker has been told he that does not have to pay back the £3,656 he was claimed to owe.

Hayley Martin, 32, an accountant from Frimley, Surrey, and a mother of two, was pursued for £7,027 and threatened with court unless she paid up. Like many others, she was told she had “no right of appeal”. Martin’s files obtained under data protection laws reveal she always informed HMRC of any changes in circumstances, but her case files were not updated.

“It it an absolutely diabolical system,” said Martin, who has recently taken out a loan to repay the debt. “It is about time the government admitted their mistakes and stopped ruining the lives of innocent victims like myself.”

Under HMRC rules, even if many of the problems were caused by official error, claimants are obliged to pay the money back if it was considered that they ought reasonably to have spotted the mistake. The problem is that even if the errors did appear in documentation, they were often difficult to spot.

Claimants who are unhappy with HMRC’s decision can have their case considered by Ann Abraham, the parliamentary ombudsman. She upheld or partly upheld 74% of the 120 cases she investigated last year and says HMRC has in many cases unfairly demanded the return of overpayments.

Paula Dean, of Tax Credit Casualties, said: “The rule is basically that officials can make as many errors as they want and you have to spot them.”

A petition for amnesty on the Tax Credit Casualties web-site (www.taxcc.org) provides a damning verdict on a system that Brown conceived as one of his greatest policies: “I have strived to be debt free all my life [and] it is abhorrent to me that I am to be put into debt by my own government.”

The problems are continuing, with the National Audit Office qualifying HMRC’s accounts because of the money lost through overpayment of tax credits and fraud.

HMRC insisted that the tax credit system was working effectively and official figures show 97% of claims were being processed correctly. It is unable to provide accurate figures on the proportion of overpayments caused by official error.

2,000 tax officers to target rich

THE creation by Alistair Darling, the chancellor, of a force of 2,000 inspectors will squeeze the super-rich by focusing on the use of offshore havens and complex trust arrangements set up to avoid paying tax, writes Robert Watts.

HM Revenue & Customs (HMRC) is to expand its special civil investigations unit as much as tenfold and will move its emphasis from corporate tax avoidance to tax evasion by rich individuals.

Those suspected of failing to disclose all their domestic and offshore income will be targeted. If they then make a full disclosure they will have to pay outstanding tax, interest and possibly also a fine. Individuals later found not to have disclosed all their earnings may face criminal prosecution.

Many of those who claim nondomiciled status (mainly foreigners living in Britain and not subject to full taxation) will be closely scrutinised.

One of the first priorities of the new directorate will be to extract unpaid tax from the hundreds of British citizens who have escaped tax through bank accounts in Liechtenstein.

Earlier this year it emerged that HMRC had paid a former bank employee about £100,000 for the names and account details of some 100 British nationals holding accounts at LGT, one of Liechtenstein’s leading banks.

HMRC is expecting to raise £300m in due tax from using the data – three times the sum that it initially expected.

REWARD FOR FAILURE

The pay-off given to Paul Gray, the senior civil servant responsible for tax credits, after he quit last November over the loss of 25m child benefit records.

£49,292
The extra money in monthly payments that Gray, former chair of HM Revenue & Customs (HMRC), still received after he left office.

£2,658
An additional compensation payment that will be added to Gray’s pension every year.

£1.7M
The bonus payments handed out to 220 senior HMRC civil servants in 2006-7.

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